Sunday, January 24th, 2021

Cocoa futures finished the week up 0.08% in New York and down 0.06% in London basis the March contracts – the pound/dollar finished the week up 0.71%. Prices continued to trade within the familiar range seen over the past month as industry and speculative buying was met with commercial selling. Following a massive rally on Tuesday, prices erased nearly all gains into the end of the week. Reports about unsold inventory in Ivory Coast continued circulate as gradings on the New York exchange picked up substantially. There are now 1,058 lots of graded cocoa in New York with an additional 656 lots pending grading. Interestingly, the majority of the graded stock are Ivory Coast Group A beans. The physical price for cocoa in the spot month has fallen by a significant amount over the past few weeks and is now near tender parity, which is reflective of the current surplus. At a time when inventories are growing at origin and the rate of demand for cocoa is falling, it was only a matter of time before cocoa needed to make its way to the terminal. I continue to believe that falling differentials will be a theme for the duration of the year as the surplus materializes. Seeing a build in exchange stocks, albeit just in the New York market so far, is a true reflection of the current state of demand. Even though the grinding reports were better than expected for the North America and Asia region, the reports for Europe were exactly in-line with market estimates, with fourth quarter grinds falling by 3.11% from the prior year to 344,151mt. Last week, Lindt reported that organic sales fell 6.10% last year with only a slight improvement in the second half. A fall of 6.10% in organic sales is particularly bad considering the company actually gained market share. How bad is the demand situation for the company’s that lost market share? Lindt’s future outlook is quite optimistic but once again assumes that the world will see a quick improvement from the pandemic. In addition to the negative news from Lindt, Godiva announced that they will be closing or selling all of its 128 brick-and-mortar stores in North America. It is obvious that the pandemic has hurt demand for cocoa and that demand will only improve as the major consumers get vaccinated and return to some level of normalcy. While we believe demand will recover in the second half of 2021 as the world gets vaccinated, cash prices in the forward contracts will need to decline further in order to incentivize additional industry buying. Until then, rallies will continue to get capped by origin selling in the forwards. Market flow in the short term may have the potential to distort prices away from their fair value. With the spec currently running a neutral position relative to their long-term average, prices continue to be vulnerable to the upside if the spec decides to build a new position.

The combined net managed money long position in New York increased by 333 lots to be 26,617 lots long from the addition of 532 longs and 199 shorts. The same position in London increased by 3,418 lots to be 18,847 lots long from the addition of 2,527 longs and 891 lots of short covering. Despite the marginal increases across both markets, both New York and London Cocoa are still two out of top three shortest agricultural commodities on the board relative to their historical range. While we don’t believe the spec will go record long in an environment with no supporting fundamentals to back the move, there will be more room the upside on the outright price for cocoa if the spec continues to add length. There is a limited amount of origin hedging left in the spot month but rallies should be capped in the forwards. As we mentioned earlier in this report, there is no reason for the industry to chase prices higher. In fact, the total price of cocoa will need to decline further in the forwards in order to attract additional industry buying.

Light rain is expected this week in both Ivory Coast and Ghana, with expectations calling for an average of 3.0mm in Ivory Coast and 2.50mm in Ghana. If the rains materialize, that should bring the average amount of precipitation during the month of January to 32.40mm in Ivory Coast and 30.29mm in Ghana, which is more than adequate to support a healthy mid-crop. There is very little that can go wrong at this point with the midcrop, as was expected in a La Nina year. Any potential adverse weather at this point would not be enough to offset the large surplus expected not only for the 2020/21 year but also for the 2021/22 season.

From a technical perspective, prices in New York continue to consolidate within a well-defined range, with support at $2,430 and resistance at $2,530. Until prices are able to post a settlement on convincing volume above or below one of these levels, the market should continue to trade within this range. In London, the uptrend line originating off the low that occurred during the week of July 17th at £1,625 has continued to provide support while prices ran into resistance at the 38.20% retracement of the move recent move at £1,719 basis the second position continuation contract. If prices rally further, the next level of resistance at the 50.0% retracement at £1,750. New York Cocoa, Second Position Continuation Chart London Cocoa, Second Position Continuation Chart As always, thank you for reading. Please feel free to reach out with any questions.

Best Regards,

Eric Bergman Vice President JSG Commodities 203.853.3000

This report has been compiled for general informational purposes only. While every effort has been made to ensure accuracy, Jenkins Sugar Group, Inc. assumes no responsibility for errors and omissions. Under no circumstances may this report be forwarded without prior approval.

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